QUESTION

XYZ (franchise) selling products under brand of PQR (Franchisor). PQR not taking any royalty from franchise. XYZ not allowed to sell product other than of PQR. E.g., MRP of product ‘X’ is Rs.100/-, ‘Franchisor’ charging XYZ Rs.90 + Rs. 2 GST= Rs. 92 by issuing a tax invoice. XYZ making payment to franchisor against this. XYZ re - selling product to customer at MRP of Rs.100/- thereby getting a profit of Rs. 8 (100 - 92). Can XYZ claim exemption up to Rs.20 Lacs or need to pay GST from day one?

ANSWER

Facts of the case:  XYZ (franchise) selling products under brand of PQR (Franchisor). PQR not taking any royalty from franchise. XYZ not allowed to sell product other than of PQR. Whether XYZ can claim exemption up to Rs.20 Lacs or need to pay GST from day one? 

Law Applicable: SECTION 24 OF CGST ACT

(vii) persons who make taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise

Interpretation:  As XYZ is authorized to supply the goods and service under the brand name of “PQR” and cannot supply the other goods and service. Hence XYZ is supplying the goods and service on behalf of the taxable person i.e. PQR. Accordingly, XYZ is covered under the Sr. No. (vii) of the Section 24 of CGST Act, 2017 and hence liable for taking GST registration. Since XYZ is liable for GST registration u/s 24, he is not eligible to claim exemption upto 20 lakhs and is required to pay GST on supply of goods and services.

Conclusion: XYZ is liable to take compulsory registration as per Sr. No. (vii) of the Section 24 of CGST Act, 2017 and is required to pay GST on supply of goods and services. (Reply dt. 13/01/2021)